Who Said House Number Two?!

I started the process to purchase my second real estate investment!

My second property is located in a middle class neighborhood in Memphis, TN. It’s a 3 bedroom 2 bath house with a big yard and car port, and the turnkey company I’m working with is currently renovating the property. The house is priced at $58,700 and the monthly rent is $725. If we deduct taxes, insurance, and management, the yearly net operating income is $6,558 which puts the CAP rate at 11%.

For this purchase I’ll be paying 40% of the property cost up front (I don’t qualify for a 30 year loan at this time) and I’ll be getting a loan for the additional 60%. The loan is a 10 year loan with a 7.25% interest rate. This means that the monthly loan payment will come out to $418 bringing the monthly cash flow to $128. That’s a 7% cash on cash return on the down payment (slightly less, 6%, when including closing costs). This will be even lower if we factor in potential maintenance and vacancy costs in which case the monthly cash flow drops to $56 (a 2% cash on cash return). Not great, since I am a cash flow investor, but as I explained in the previous blog post this is worth it for me since my goal is to create lump sums of passive income in the next 10-15 years and not necessarily today.

Now while you might be thinking to yourself that I’m totally crazy (and I might be…) for getting into an investment where my monthly cash flow is so low, you need to remember that after these 10 years, my cash on cash return will jump to 21% since the NOI will be my cash flow. In other words in 10 years (not as far away as you think it is) my cash flow will be $546.50 each month or $6,558 per year (and it will most likely be high since rent does go up with time).

Well there you have it, house #2!